In today's most anticipated Fed speech, outgoing NY Fed president Bill Dudley delivered a speech at a SIFMA conference in New York, titled "The Outlook for the US Economy in 2018 and Beyond", in which he warned bluntly that the prospect of U.S. economic overheating "is a real risk over the next few years" and cautioned that one area he is "slightly worried about is financial market asset valuations, which I would characterize as elevated."

But before algos read too much into it, he immediately hedged that even a "significant" market drop would not have the "destructive impact" we saw a decade ago, to wit:

I am also less worried because the financial system today is much more resilient and robust than it was a decade ago. Thus, even if financial asset prices were to decline significantly—which presumably would occur if the economic outlook were to deteriorate—I don’t think such declines would have the destructive impact we saw a decade ago.

Is he right? We will let readers decide...

He then reverted back to rates, saying that "I will continue to advocate for gradually removing monetary policy accommodation. As I see it, the case for doing so remains strong."

The reason for that is the same one Bank of America highlighted earlier: namely that "financial conditions today are easier than when we started to remove monetary policy accommodation." Which is precisely what Goldman warned nearly a year ago, when it said that it appeared that Yellen had lost control of the market.

Sure enough, to Dudley, "this suggests that the Federal Reserve may have to press harder on the brakes at some point over the next few years. If that happens, the risk of a hard landing will increase."

Dudley wasn't done, and realizing he has little to lose by telling the truth, now that he is on his way out, said that "the second risk is the long-term fiscal position of the United States." I.e. US debt.

Still, he said that "the economy is likely to continue to grow at an above-trend pace, which should lead to a tighter labor market and faster wage growth."

“Under such conditions, I would expect the inflation rate to drift higher toward the FOMC’s 2 percent long-run objective."

Finally, Dudley also touched on the recent passed tax cut and said that “while the recently passed Tax Cuts and Jobs Act of 2017 likely will provide additional support to growth over the near term, it will come at a cost."

Stocks, predictably, have not responded one bit to Dudley's surprisingly blunt warning.

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Separately, Dudley echoed the Fed's recent mantra that the flattening yield curve is not a worrisome sign, upgrade his GDP growth view for 2018 from 2.5% to 2.75%, and said that he sees inflation rising to target in the medium term whil unemployment falls below 4%.

To sum up Dudley's statement:

I am optimistic about the near-term economic outlook and the likelihood that the FOMC will be able to make progress this year in pushing inflation up toward its 2 percent objective. The economy has considerable forward momentum, monetary policy is still accommodative, financial conditions are easy, and fiscal policy is set to provide a boost. But, there are some significant storm clouds over the longer term. If the labor market tightens much further, it will be harder to slow the economy to a sustainable pace, avoiding overheating and an eventual economic downturn. Another important issue is the need to get the country’s fiscal house in order for the long run. The longer that task is deferred, the greater the risk for financial markets and the economy, and the harder it will be for the Federal Reserve to keep the economy on an even keel.